Direct vs Regular Mutual Funds

Direct mutual fund plans offer higher returns due to a lower expense ratio than regular mutual funds. Unlike direct funds, regular funds have a higher expense ratio, which eats out your return and offers slightly lower returns.
EXPLORE FUNDS
Direct vs Regular Mutual Funds
EXPLORE FUNDS
4 mins read
07-August-2024

Mutual funds are popular investment options that offer a simple and effective way to grow your wealth. When it comes to investing in mutual funds, you often have two choices: direct mutual funds and regular mutual funds. Understanding the differences between these two options is crucial for making informed investment decisions. In this article, we will explore the distinctions between direct and regular mutual funds, so you can choose the right path to meet your financial goals.

There are two versions of mutual funds: direct mutual funds and regular mutual funds.

One of the major differences between these types of mutual funds lies in the expenses incurred. Direct mutual funds are generally more beneficial for investors because they have lower expense ratios compared to investments via regular mutual funds. This is due to the absence of distributor commissions in direct MFs, resulting in more of your money being invested in the assets under management (AUM).

What is a direct mutual fund?

Direct plans are bought from the AMC and no intermediary is involved. Direct mutual fund plans are designed for investors who want to invest in mutual funds without involving intermediaries like distributors or brokers. In a direct plan, investors directly buy mutual fund units from the Asset Management Company (AMC). This results in certain advantages, such as lower expenses and comparatively higher returns than regular plans. Direct plans can be bought either directly with the AMC or online through digital platforms.

There are two ways to invest in direct plans:

  1. You can invest in direct plans online by visiting the AMC's website or by going to the AMC or the registrar’s office in your city.

  2. You can also invest in direct plans through SEBI Registered Investment Advisors (RIAs); RIAs, however, charge a fee to their clients for their advisory services.

Since mutual fund distributors are not involved in direct plan investments, these plans typically have lower expense ratios and can yield higher returns compared to regular plans.

What is a regular mutual fund?

Regular plans are bought through mutual fund distributors. Regular mutual fund plans are the more traditional approach. In these plans, intermediaries like financial advisors or distributors facilitate your investment in mutual funds. They provide assistance, information, and services, but these benefits come at a cost, usually in the form of higher expense ratios because brokerage fees or commissions for the broker are also involved.

Mutual fund distributors provide services like advising investors on which mutual scheme to invest in, submitting investor’s Know Your Client (KYC) documents to the Registrars and Transfer Agents (RTAs) or AMCs, helping investors with the investment process (e.g., submitting application forms and cheques to the RTAs/AMCs), and offering ongoing services such as generating account statements and processing redemption requests.

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Frequently asked questions

How will I know if I have invested in Direct or Regular Plan?

You can check your mutual fund statement or login to your fund's online portal. The type of plan (Direct or Regular) will be clearly indicated. Alternatively, contact your mutual fund company or advisor for confirmation.

Is it good to switch from regular to direct plan?

Yes, it can be beneficial to switch from a regular to a direct plan, especially if you are comfortable managing your investments independently and wish to reduce costs.

Why to switch to direct mutual fund?

Switching to a direct mutual fund can save on intermediary commissions, resulting in a lower expense ratio and potentially higher returns. This approach is ideal for investors who prefer greater control over their investment decisions.

Which is better, regular or direct mutual fund?

When choosing an investment plan, it's important to consider your specific needs. Direct plans typically offer the potential for higher returns due to their lower costs. However, managing a direct plan usually requires you to conduct your own research and make investment decisions independently. On the other hand, regular plans offer the benefit of advisor guidance, which can be helpful for those who prefer professional assistance. However, it's important to note that regular plans often come with higher fees and potentially lower returns.

What are the disadvantages of direct mutual funds?

The main drawback is the lack of personalised investment advice from a financial advisor. You will need to be comfortable researching and making your own investment decisions.

Is it good to switch mutual funds from regular to direct?

When you switch to a direct plan, you can potentially save money on fees and improve your investment returns. It's important to note that regular plans may have exit loads, so be sure to carefully review any associated fees before making the switch.

Why are regular mutual funds better?

Regular plans might be better if you are a beginner who needs help with investment decisions. They offer guidance from an advisor, but this comes at the cost of potentially lower returns.

Which SIP is best - regular or direct?

A Direct SIP is generally better due to lower costs. This allows you to potentially earn higher returns over time through a Systematic Investment Plan (SIP).

Why is direct plan NAV higher?

Direct plans have a lower expense ratio (fees) compared to regular plans. Since the NAV (Net Asset Value) reflects the value of the fund's holdings minus its expenses, the lower fees in direct plans lead to a slightly higher NAV.

How do you convert regular MF to direct?

The process to switch from a regular to a direct plan for the same mutual fund scheme can vary depending on the fund house. Generally, you can initiate the switch online through your investment platform or by contacting the fund house directly.

What’s the difference between the total expense ratio of direct and regular plans?

Direct plans have a lower expense ratio because they do not involve commissions paid to distributors. Regular plans have a slightly higher expense ratio to cover those fees.

How does the expense ratio impact the returns of direct and regular plans?

A lower expense ratio in direct plans translates to potentially higher returns compared to regular plans. Over time, even a small difference in expense ratio can significantly impact your investment growth.

How do I change the SIP from regular to direct?

Contact your investment platform or AMC (Asset Management Company). They can guide you through the process of switching your SIP (Systematic Investment Plan) from regular to direct. This usually involves filling out a form and may take a few business days to complete.

Is there a penalty for switching mutual funds?

There's typically no penalty for simply switching between mutual funds. However, exit loads might apply if you redeem your units within a specific lock-in period (usually short-term). Check your fund's details to confirm any exit load fees.

Who should invest in direct mutual funds?

Investors who have the knowledge, confidence, and time to manage their investments independently should consider direct mutual funds. These investors are typically more experienced, comfortable making their own decisions without financial advisors, and seek to minimise costs to maximise returns.

Are direct mutual funds taxable?

Yes, direct mutual funds are taxable. Capital gains from these funds are subject to taxes based on the holding period and the type of fund, with short-term and long-term capital gains attracting different tax rates.

Why Direct plan NAV is higher than regular plan?

Direct plan NAV is higher than regular plan NAV because direct plans do not incur distribution and commission fees paid to intermediaries. This cost saving results in higher returns, which accumulates over time, reflecting in a higher Net Asset Value (NAV).

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The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

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